Published in the Baltimore Buisness Journal on February 3, 2023
Written by: Tom Watson, CFA, CFP®
As a CERTIFIED FINANCIAL PLANNER™ professional, I understand the importance of charitable giving and its impact on our communities. Whether you're a seasoned philanthropist or new to charitable giving, understanding the key differences between private and public foundations can help you make informed decisions about your charitable giving strategies.
Individuals, families, or corporations typically fund their private foundations to give back to the community and make a positive impact. The donor or their family usually manages the foundation and may have more flexibility regarding the causes they support and how they distribute their funds. As of the end of 2021, most private foundations had less than $10 million in assets. Some examples of well-known private foundations include the Bill and Melinda Gates Foundation, the Walton Family Foundation, and the Charles Koch Foundation.
Private foundations may be a good option for donors who want a more hands-on approach to charitable giving. Because a single source typically funds them, private foundations may have more flexibility regarding the causes they can support and the organizations they can donate to. This flexibility can make it easier for private foundations to respond to emerging needs or issues and to be more targeted in their giving.
However, private foundations also come with some additional responsibilities and obligations. For example, private foundations are subject to a minimum of 5% asset distribution requirement and an excise tax on their investment income, which can impact their financial performance. In addition, private foundations are required to meet specific reporting and disclosure requirements, including filing an annual tax return and providing financial information to the IRS.
Public foundations are funded by a wide range of sources, including individuals, corporations, and government agencies, to support a specific cause or issue. A board of directors separate from the donors will then manage the foundation. As a result, public foundations are typically more transparent in their operations and decision-making processes and may have stricter guidelines for how they use their funds. On average, public foundations have even more assets than private foundations. Some examples of public foundations include Meals on Wheels America, YMCA of America, and various Community Foundations.
Public foundations may be a good option for donors who want to support a specific cause or issue and are comfortable with a more structured approach to charitable giving. Because a wide range of sources funds them, public foundations may have more resources and stability than private foundations. In addition, public foundations are generally exempt from the excise tax on investment income, which can help to maximize their financial performance.
However, public foundations also come with some additional restrictions and requirements. For example, while public foundations are not required to meet specific distribution requirements, they are expected to collect at least one-third of donations from the general public or meet the 10% facts and circumstances test to maintain their tax-exempt status.
Making the Right Choice for Your Charitable Giving
Due to administrative obligations and substantial financial commitment associated with establishing and maintaining a foundation, they only make sense for some. Fortunately, alternative options allow charitably inclined individuals and families to create a personal gifting vehicle without the administrative matters associated with a foundation or the half-a-million-dollar minimum commitment of a foundation. For instance, an individual could fund a donor-advised fund (DAF) with appreciated securities and then use those assets to make grants to qualified 501(c)(3) organizations over the donor's or their heir's lifetime. In addition, the initial tax benefits of a DAF can make them an even more attractive gifting vehicle than a private foundation since tax deduction rules differ between the two. And for existing private foundations that may no longer appreciate the ongoing oversight requirements, converting the foundation to a donor-advised fund may be worth exploring.
At Williams Asset Management, we understand the importance of charitable giving and its impact on our communities. Whether you're interested in setting up a private foundation or supporting a public foundation, our team of CERTIFIED FINANCIAL PLANNER™ professionals can help you explore your options and make informed decisions about your charitable giving. Contact us today at 4107400220 or 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045 to learn more about how we can help.